Business Ideas

Start-Up Businesses Source Of FinanceMaking sure your business has sufficient money to grow is a big challenge for start-ups. Since the recession, banks have become more risk-adverse. Around a third of start-up and early stage businesses get refused credit by the banks, while a number of businesses are discouraged from even applying for finance. So where can start-up businesses look for finance? 

Investing your own cash

Start-up business owners should be prepared to put their own cash into a new business. Stakeholders such as customers and suppliers, as well as finance providers, will expect to see a personal commitment from the business owner before they will even consider doing business with a start-up. If you are passionate about your business idea and confident it will succeed once it's on its feet, you should be ready to put some of your own savings into the venture. Not only is this the most natural first step, it can also make good business sense. You are more likely to push your business forward if your neck is on the line. You are likely to interest investors more too, if they see you are fully-invested yourself. Just remember to treat a personal investment just as you would that of an outside investor: re-mortgaging your house and throwing in your entire life savings while hoping for the best is not a sound business decision. A popular option - if you don't invest your own money directly in the business - is to take no salary from the business and live off your savings instead. There are other options besides putting your own money into the venture, of course. You could consider calling on the 'three F's', for instance: Family; Friends  - and Fools, so it goes. It's a good idea to make a formal rather than a verbal arrangement, determining whether your family member or friend's money serves as a loan, or as an investment for instance. Tread carefully, as misunderstandings can damage relationships: it's only advisable if your business is primed for strong, consistent, growth. That said, the three FFFs are usually by far the most affordable form of small business finance out there - and, providing you're successful, arguably the most hassle-free form of investment for those investing too. See Business Link for further legal, tax and general considerations on the three F's. Strike a balance: invest personally in your business, but leave yourself room to exit incase it doesn't go as expected   

Friends And Relatives

A relative or friend who has been in business should understand the needs of a start-up and may be prepared to provide finance. However, it’s important that the basis on which money is offered is clearly defined and put into a written agreement. Misunderstandings and disagreements do happen and a written agreement provides the evidence of the basis on which the loan was offered. Barrie Terblanche, author of Start your own business in South Africa says that this is the biggest source of business finance around the world; and provides an incentive unlike no other. 'If you convince your aging mother to take a bond of R300 000 out on her house, you’re going to be slightly more careful with this money than if you’d borrowed it from the bank,' he says. If you don’t like the idea of appealing to your personal network for money, perhaps they can help out with things like office equipment or work space. 

Credit cards 

Many start-up businesses have limited overheads, such as motor expenses and office stationery. A personal or business credit card can be used to pay for these expenses provided the amount of credit is controlled. When the business becomes more established, suppliers will be more prepared to provide goods and services on credit. 

Credit unions 

Credit unions are not the same as banks, they’re nonprofit organizations owned by their customers, which often helps keep their loan rates low. Before applying for a loan, you have to become a ‘member’. As long as you meet their criteria you’re in. You’ll often qualify by sharing characteristics with other members, such as where you work or where you live. Like bank loans, credit union loans usually require you to prove your creditworthiness. 

Grants  

Grants are sometimes available from central or local government, usually for specific groups of people, or sectors that government wants to encourage. There is a wide variety of business grants available: they are available from the government, from your local authority, from your regional development agency, and from the EU. Grants aren't available for all businesses though - the EU's grant activities are limited to public sector funding, for example - so before applying, make sure to check your eligibility. Be prepared for a complicated application process. Areas where grants proliferate include research & development (R&D); employment and training; and environmental schemes. Business Link's Grant and Support Directory is a great place to check whether there is a grant out there for your company. If the application process deters, you can contact your local Business Link for help with your application, or it's possible to hire a consultant to help you with the grant application process. As many grants are awarded on a competitive basis, this is an option worth considering: it may raise your chances against other applicants. Remember to research eligibility criteria and consider hiring a consultant 

Charity finance 

Some charities, such as the Prince’s Trust, offer loans to start-up businesses, usually for specific groups of people such as the under 25s or over 50s. Sometimes they provide finance alongside help such as mentoring or training courses. Apart from banks, other formal funding institutions exist which provide loans for businesses. Business Partners is an example of such an organization - this local company supports entrepreneurial growth by providing financing as well as added-value services (mentoring etc) for viable small and medium enterprises. You will need to present a solid business plan with clear forecasts and realistic budgets.   

Bank finance – overdraft or loans 

Bank loans or overdrafts are still very popular with businesses. However, banks usually insist on the finance being secured on the assets of the business or supported by personal guarantees from the business owner. Additionally, for loans over a certain amount, banks require a convincing business plan and financial forecasts showing how the loan will be repaid. Few banks will lend to a new start-up but as the business establishes a positive ‘track record’ they will be more prepared to consider finance. If you believe the headlines, banks are not the best place to source business finance, but nevertheless, around two thirds of those seeking funding pay their bank manager a visit. If you can get funding from a bank, it means you will have more control over your business and determine how fast it can grow, but if you don't have a solid track record in setting up in business, a bank loan may be difficult to secure.
Positives in banking: Loans come in all shapes and sizes: there will be one that's suited to you, Credit and pre-agreed overdrafts provide welcome safety nets 
Negatives in banking: Beware of high interest rates, especially when considering credit cards: look into fixed-rate and capped-rate loans. Look out for hidden charges, late-payment charges or early-redemption penalties. With criteria becoming more stringent, it can be difficult to secure a small business loan - or even a good start-up business account -- without proven track record. When setting up an account, applying for a bank loan, or for credit cards or an overdraft, it's important to have an excellent business plan prepared. You need to show that your business is ready for investment and you should also have clear sales projections and a robust cash-flow forecast. It's worth considering offering personal guarantees to secure the loan, if you have personal assets. If you are finding it difficult to secure credit, you are well advised to look into the Enterprise Finance Guarantee (EFG) scheme. 

Hire purchase, leasing or hiring 

If a start-up business needs to buy business assets they should always consider hire, hire purchase or leasing. Under hire or leasing agreements the asset always remains the property of the finance provider. Under hire purchase the asset is purchased by the business and the purchase is paid for over an extended period. Both allow the use of the asset whilst paying for it over a fixed period. This avoids tying up money unnecessarily. 

Invoice Factoring and Discounting 

These forms of finance are based on a business selling its sales invoices to a finance provider who advances a fixed percentage of the invoice. When the customer pays the invoice, the finance provider pays the balance to the seller, less their interest and administration costs. Factoring provides the additional advantage of a full sales ledger and collections service under which the Factor takes on the responsibility for the sellers’ sales ledger. Under an Invoice Discounting service, the seller continues to administer the sales ledger and the service is usually undisclosed to customers. 

Small scale equity finance such as business angels 

Business angels are usually successful business people who are prepared to buy a stake of between about 10% and 40% of a business. Many have a preference for the sector they made their money in. They will often undertake the due diligence themselves, relying on their experience to guide them, and will usually ask for a seat on the board. To attract a business angel a compelling business plan demonstrating a clear growth strategy is absolutely essential. Individual business angels will usually invest between £25,000 and £250,000, however syndicates may invest up to £1 million or more in a limited number of situations. Angel investors are similar to equity partners, in that they seek large returns from a few companies in a portfolio of investments. They are usually more flexible, however, as it is their own wealth at stake. Angel investors are often successful entrepreneurs who are keen to invest in small companies in industries that they are personally passionate about.  Add experience: Seeing some gray hair on your management team will help ease investors' fears about your company's ability to deal with a tough economy. Even an unpaid, but highly experienced adviser could add to your credibility.  Don't be a fad-follower: Did you start your company because you are truly passionate about your idea or because you want to cash in on the latest trend? Angels can spot the difference and won't give much attention to those whose companies are essentially get-rich-quick schemes.  Know your stuff: You'll need market assessments, competitive analysis and solid marketing and sales plans if you expect to get anywhere with an angel. Even young companies need to demonstrate an expert knowledge of the market they are about to enter as well as the discipline to follow through with their game plan. Keep in touch: An angel may not be interested in your business right away, especially if you don't have a track record as a successful entrepreneur. To combat that, you should formulate a way to keep them in the loop on big developments, like a major sale. 

Private equity or venture capital 

For very high growth businesses with a good track record, private equity companies can often invest in excess of £10 million. Again, a convincing business plan is a must. They tend to have preferred sectors for investment and favour businesses with very high growth potential, seeking an exit from their investment (by floatation on a public market or trade sale) and selling their shares within five to seven years.  Business angels and Venture Capitalist (VC) firms provide investment in exchange for a share of your company. While this means you'll be giving up a share of your business - and therefore the profits - the backers will also give you their expertise and help you generate new contacts as well as supporting the management of your business.  It's likely there will be a planned exit identified, at which point the investors will expect to have realised their return. Generally, for a business angel to be interested in your proposition, your business should have the potential to grow exponentially over the next three to five years. Angel investors look for a good return on their initial investment - of up to £750,000 - after a three- to seven-year holding period, and the average return on angel investments in the UK is 22% after four years. Venture Capitalists are generally interested in specialised areas and high-growth businesses looking to raise between £2m and £5m. It's worth bearing in mind, while VC's have larger cheque-books, they also take a larger percentage - a minimum of 20%  -- of your business, and take a very pro-active role in your company. In contrast, Angels tend to take a more supportive role, but once they have invested, both VC's and Angels expect results. Be prepared for a change in dynamic once the business changes from your 'baby' into a full-grown firm with a board of investors calling your decisions into account  - it's a very different set-up. Log on to the British Business Angel Association to find investors and attend networking events 

Bank finance information requirements 

When looking to a bank for finance, here are four top things to keep in mind: A business plan with convincing narrative. Cash flow forecasts showing how much finance is required and when it will be repaid. Past financial reports. Detail of the key people in your business with information on their credit histories and explanations for past difficulties. With so many businesses struggling to survive, it’s helpful to be able to draw on the expertise of leading financial experts. Start today! Other options for funding growth include: Selling more, Charging more for your product – what effect would there be by increasing your sales price by 30, 50 or 100%? In many cases increasing sales price will increase sales, Establishing better sales channel partners – preferably ones that already have your target market as customers, Using customers as promoters of your product, Sharing promotion costs with distributors, Licensing deals, Structuring payment options eg. 50% deposit with order, Debt finance, Invoice factoring, Government grants – yes there are still some available.
Even the most cash-generative companies need funding to either start or grow. Regardless of how much money you're able to put in yourself, it's important to step back and consider the business finance options open to you. Typical small business funding comes from either friends and family or banks, but there are actually a range of business finance solutions available.

Funding By The Crowd

Crowdfunding is another alternative funding option, which has gathered popularity with the advent of social media. Entrepreneurs pitch their ideas on various crowdfunding sites; and interested investors come forward to support with whatever amount they are prepared to put forward. This method splits the risk between the 'crowd'; a viable model for supporting up-and-coming entrepreneurs. Finding finance for your business can be a daunting task, so it’s useful to know that there are more than a few doors for you to knock on. It’s certainly not the first challenge you’re going to face as an entrepreneur, and if you have the skills necessary to start and run a successful business, it shouldn’t be an issue that will hinder you. 

Why raising finance is important 

If your company needs to grow quickly to accommodate demand and make a mark, organic profit revenue may not cut it. If you encounter unforeseen difficulties - delays with suppliers or late payments from clients - a financial cushion could save your business. Finance types. It is vital you select a source of small business financing that doesn't just provide the capital you need but has repayment terms to suit your growth and which you, as an individual, are comfortable with. The type and size of investment you seek will depend on the stage your business has reached. This guide looks at your options: explore all those open to you: Personal investment, Banks , Grants and government support, Private equity, Asset-based financelook into the Enterprise Finance Guarantee (EFG) scheme.
If your company needs to grow quickly to accommodate demand and make a mark, organic profit revenue may not cut it. If you encounter unforeseen difficulties - delays with suppliers or late payments from clients - a financial cushion could save your business. Finance types. It is vital you select a source of small business financing that doesn't just provide the capital you need but has repayment terms to suit your growth and which you, as an individual, are comfortable with. The type and size of investment you seek will depend on the stage your business has reached. This guide looks at your options: explore all those open to you: Personal investment, Banks , Grants and government support, Private equity, Asset-based financelook into the Enterprise Finance Guarantee (EFG) scheme.